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The status of SAS 134, 135, 136 and beyond

By Jerome R. Reutzel, CPA, MBT

October 18, 2021

COVID-19’s effects rippled through every facet of our lives. Auditing standards weren’t immune to this, with the effective dates for Statements on Auditing Standards (SAS) 134–140 being delayed by the Auditing Standards Board (ASB) (SAS 141) to provide relief because of the pandemic.
 
However, the delay is coming to an end. The standards will take effect for audits of financial statements for periods ending on or after Dec. 15, 2021. Early implementation is allowed, but simultaneous implementation is required. Here’s what you need to know about the SAS 134–136 changes.

SAS 134 — Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements

SAS 134 is a series of new reporting standards, which include a new AU-C 701, Communicating Key Audit Matters in the Independent Auditor’s Report, and replaces:
  • AU-C 700, Forming an Opinion and Reporting on Financial Statements.
  • AU-C 705, Modifications to the Opinion in the Independent Auditor’s Report.
  • AU-C 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report.
The AICPA ASB has observed developments in the auditor reporting model in the United States and internationally. These changes are meant to improve the informational value and relevance of the auditor’s report.

The following are the most significant changes to the auditor’s report:
  • The Opinion section is presented first, followed by the Basis for Opinion section.
  • The Basis for Opinion section includes a statement that the auditor is required to be independent and meet other ethical responsibilities.
  • The report includes a description of management’s responsibilities for assessing ongoing concern, provided the applicable financial reporting framework contains the requirement.
  • The communication of key audit matters (KAMs) would not be required for non-issuers unless the terms of the audit engagement include reporting KAMs.
  • The description of the responsibilities of management for the preparation and fair presentation of the financial statements is expanded to include a requirement to identify those responsible for the oversight of the financial reporting process, when those responsible differ from those who prepare the financial statements.
  • The description of the responsibilities of the auditor and key features of the audit are expanded.
  • Those matters that, in the auditor’s professional judgment, were of most significance in the audit or financial statements of the current period. KAMs are selected from matters communicated with those charged with governance.
Significant audit attention might include:
  • Account balances, classes of transactions or disclosure with a higher assessed risk of material misstatement.
  • Matters that pose challenges to the auditor in obtaining sufficient appropriate audit evidence or pose changes to the auditor in forming an opinion on the financial statements.
  • Complex and significant management judgments that result in difficult and complex auditor judgments. 

SAS 135 — Omnibus Statement on Auditing Standards

SAS 135 is intended to align ASB guidance more closely with Public Company Accounting Oversight Board (PCAOB) standards by amending:
  • AU-C Section 260, Communications with Those Charged With Governance.
  • AU-C Section 550, Related Parties.
  • AU-C Section 240, Consideration of Fraud in a Financial Audit.
The statement includes additional communications about the auditor’s views relating to the entity’s significant unusual transactions, related party transactions and the potential effects of uncorrected misstatements on future-period financial statements.

SAS 136 — Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA

This new standard addresses an auditor’s responsibility to form an opinion on the financial statements of employee benefit plans subject to ERISA (Employee Retirement Income Security Act of 1974), as well as the form and content of the auditor’s report issued on the financial statements of an ERISA plan. ERISA plans include 401(k), 403(b), defined benefit and health and welfare plans. It should not be adapted for plans that are not subject to ERISA.


What to expect

The biggest change for auditors after the effective date is that audits previously referred to as “limited scope” audits will now be referred to as “ERISA section 103(a)(3)(C) audits.” The audits will no longer be considered to have a scope limitation when the investments are certified by a qualified institution. ERISA section 103(a)(3)(C) audits are considered unique to employee benefit plans and auditors will no longer issue a modified opinion. Instead, the opinion section of the audit report will have two parts: It will provide an opinion on whether the information not covered by the certification is presented fairly, and an opinion on whether the certified investment information in the financial statements agrees to or is derived from the certification.

Another significant change to the auditor’s report specifically for ERISA engagements is included in the management’s responsibility section of the report. Because management has specific responsibilities related to an employee benefit plan that are not similar to other industries, the report expands the description. Management responsibilities include maintaining a current plan instrument, administering the plan, and determining that the plan’s transactions are presented and disclosed in the financial statements in conformity with the plan’s provisions — including maintaining sufficient records with respect to each of the participants.

Other changes to the auditor’s report align with the requirements of SAS 134. Illustrative examples of auditor’s reports for employee benefit plans are included in the SAS and cover various circumstances, including situations when prior period financial statements were audited by a predecessor auditor or not audited at all.

Other highlights

Besides the auditor’s report, SAS 136 also has new requirements in all phases of an audit of ERISA plan financial statements. The SAS specifically address requirements for engagement acceptance, and audit risk assessment and response. This includes the auditor’s consideration of relevant plan provisions, communications of reportable findings with those charged with governance, auditor’s responsibilities relating to the ERISA-required supplemental schedules and the Form 5500.

The following highlight some of the specific requirements:
  • As part of engagement acceptance, the auditor is required to obtain agreement of management that it acknowledges and understands its responsibilities for maintaining the current plan instrument, administering the plan and determining whether ERISA Section 103(a)(3)(C) audit is permissible.
  • As part of the risk assessment process, the auditor needs to consider the plan provisions and whether to test specific plan provisions.
  • The auditor is required to evaluate whether prohibited transactions identified by management or as part of the audit have been appropriately reported in the applicable ERISA-required supplemental schedules.
  • Management is required to provide the auditor with a draft of the Form 5500 prior to the date of the auditor’s report so that the auditor may review it for items that may be materially inconsistent with the audited ERISA plan financial statements.
  • The standard defines reportable findings and requires them to be communicated in writing.
For auditors performing audits of employee benefit plan financial statements, the delay allows more time to examine their auditing practices and make adjustments to implement the new requirements. The new standard requires many procedures when planning and performing audits that were not expressly required in the past, so it behooves you to gain an understanding of the new way of business.

Jerome R. Reutzel, CPA, MBT, is a principal with the firm Boeckermann, Grafstrom & Mayer, LLC, performing in-charge and quality control responsibilities for the firm’s audit, accounting and tax clients. He has a very broad background of work experiences in accounting, consulting and taxation. His client base includes broker-dealers, franchisers, governmental entities, hotels, manufacturers, distributors, nonprofits, private schools, retailers and professional services.